Centurion Apartment REIT: Canada's Housing and Rental Supply Cannot Keep Up with Demand

We incorporate institutional-quality alternative investments, such as private real estate, private debt, and private equity, when building investment portfolios for our clients. We use alternative investments to deliver consistent risk-adjusted returns as well as to reduce portfolio volatility. Institutional investors, such as pension funds and endowments, have extensively used private market investments as a means of diversification beyond traditional asset classes like stocks and bonds. As an example, in fiscal 2023, the Canada Pension Plan’s net assets totaled $570 billion, with alternative investments comprising over half of the portfolio. Our clients gain exposure to private real estate through multiple alternatives including Centurion Apartment REIT.

Centurion Apartment REIT focuses on multi-family rental apartment buildings and student housing properties across Canada and the U.S. The firm’s investment strategy is centered on buying undervalued apartment and student housing properties at reasonable capitalization rates, with low vacancies, stable tenant bases, and room for further cash flow growth. Centurion Apartment REIT has seen a number of trends over the past few years that have created favorable tailwinds in the apartment market.

Last year, many factors including strong immigration and employment growth have contributed to lower vacancy rates and higher rents. According to the Canada Mortgage and Housing Corporation (CMHC), the national vacancy rate for purpose-built rental apartments declined to a new low of 1.5% in 2023 (vs. 3.1% in 2020 and 2021 and 1.9% in 2022). This is the lowest national vacancy rate since CMHC started tracking it in 1988. Growth in the average rent for 2-bedroom purpose-built apartments ballooned to a new high of 8% (vs. 5.6% in 2022 and 3% in 2021) and well above the 1990-2022 average of 2.8%. Strong rental demand continues to outpace supply.

Canada is facing a significant housing supply shortage. And as we review the data, we have the view that the housing supply and demand imbalance could continue for a long time. Here are a few factors to take into consideration:

• CMHC estimates that 18.19 million housing units could be available by 2030. However, to achieve housing affordability in Canada, CMHC estimates that there needs to be 22 million housing units available by 2030. There is a clear housing supply gap. More housing will be needed to restore affordability. According to RBC, Canada’s rental housing gap could exceed 120,000 units by 2026—nearly four times the current 25,000 to 30,000-unit deficit in Canada’s purpose-built rental stock. To achieve a balanced market with rent stability, Canada would need to add 332,000 units to its existing purpose-built rental stock. RBC indicates that a market achieves a balanced state when the vacancy rate is at 3%, but we are far away from that optimal rate.

• To ensure stability and affordability in the rental market, the obvious solution is to increase the supply of purpose-built rentals and housing in general to meet current and future demand. However, it will be challenging to meet housing demand when there is a shortage of skilled labour in the construction industry in Canada. According to CIBC, one-fifth of Canada’s construction workforce is nearing retirement. No fewer than 300,000 will retire in the coming decade. This comes at a time when the industry is currently struggling to fill a gap of around 80,000 job vacancies—a record high vacancy rate. Like housing, the imbalance in the jobs market has contributed to rising labour costs. In fact, wages in construction are rising double the rate of other industries. Overall building costs have surged (51% in 2022 vs. 2020) because of rising prices of concrete, steel, lumber, and other materials, as well as the rise in borrowing costs due to higher interest rates. Rising costs could prompt developers to slow down, which would then add more pressure to housing supply.

• Canada’s population growth is outpacing housing development. The Fraser Institute reports that the difference between the number of new homes constructed and the increase in population is at its largest in the past 50 years. From 2018 to 2022, Canada’s population grew by 553,568 people (each year, on average) compared to an annual average of only 205,762 new homes built. In Ontario, housing completions equaled less than 30% of population growth over the same time period. Canada's population growth for the first nine months of 2023 (+1,030,378 people) surpassed the total growth for any other full-year period since Confederation in 1867. A large contributing factor to population growth is immigration. Canada’s immigration goals have been very aggressive, with plans to admit 1.485 million new permanent immigrants between 2024 and 2026. As previously discussed, there is a shortage of homes. Canada’s population growth will only add more demand into the mix, make vacancies tighter, and erode housing affordability. Housing construction simply cannot keep up.

All of these trends point to a strong apartment market. Housing shortages, rising interest rates, and cost inflation are contributing to affordability issues that have pushed individuals and families out of ownership entirely and towards rentals for accommodation—which in turn is increasing competition and pricing for rental units as rental apartment supply cannot keep up with demand.

In our view, Centurion Apartment REIT is a key beneficiary of these secular trends in the apartment market.